Real Estate

How to Play the Home Price/Rent Gap

A home for sale sits next to an unfinished lot at a development in Greensboro, North Carolina

It’s the paradox of our housing market: Home prices remain low while the cost to rent is high. For investors who can take advantage of that gap—those who can buy foreclosures on the cheap and rent them out to people who can’t afford to, or don’t want to, purchase a house—there’s a lot of money to be made. It could reach above $100 billion during this year alone, according to a new report by the real-estate-data firm CoreLogic.

Investors who have access to enough capital to scoop up foreclosures can earn more than 8 percent returns—not shabby in this era of near-record-low interest rates. Institutional investors such as private-equity firms have been clamoring to get into a market that has historically been restrained by government regulations limiting the purchase and rental of foreclosures. Those limits are changing as federal officials begin relaxing the rules. Federal Reserve Chairman Ben Bernanke has been calling for more rentals and on April 5, the Fed released guidelines by which banks can become landlords. In February, Fannie Mae, which owns more than 100,000 foreclosed homes, launched a pilot program to sell the foreclosures in bulk to investors. The pilot, which included about 2,500 homes, focused on Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix, and parts of Florida.

Some of those are locations that CoreLogic says offer the best returns for investors. The firm states that in Florida and the Midwest—including the West Palm Beach, Cleveland, and Chicago metro areas—investors can recoup the costs from buying foreclosures in less than a year. Such activity could also boost local economies. Morgan Stanley estimates that cleaning up and repairing rental properties could create as many as 800,000 new jobs and that maintaining the properties could add 1 million more. That would mean housing could return to its customary role of lifting the economy, rather than dragging it down.